Question

am i Saved Two assets have the following expected returns and standard deviations when the risk-free rate is 5%: Asset A E(rA) 10% o20% Asset B E(rB) = 15% OB - 27% An investor with a risk aversion of A 3 would find that on a risk-return basis. Multiple Choice only asset A is acceptable only asset B is acceptable

Answer 1

I D E G H 0.05 B 10% 20% 15% 27% 1 risk free rate 2 3 Expected return 4 standard deviation 5 6 A 7 risk aversion coefficient for which investor will be indifferent between the 2 8 assets 3.97 10 11 since the risk coefficient for the ivestor is 3, which is < 3.97 as calculated above, the investor would 12 derive more utility from the riskier asset which is Asset B since standard deviation for B is > standard 13 deviation for A 14 Hence, only asset B would be acceptable 15

B 0.05 A 1 risk free rate 2 3 Expected return 4 standard deviation 5 6 A 7 0.1 0.2 0.15 0.27 3 risk aversion coefficient for which investor will be indifferent 8 between the 2 assets =(B4-B3)/((0.5*C4*C4)-(0.5*C3*C3)) 9 10

Here the utility function used is U = Expected return - 0.5*A* Variance

A = risk aversion coefficient

we have equated the Utility function for the assets to get the Risk aversion coefficient for which the investor will be indifferent between Asset A & B